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Domestic demand drives Chinese economic recovery amid export woes
03 July 2020Bernard Aw
Caixin PMI rises to highest since 2010…
…accompanied by stronger sales growth
Business sentiment improves further
Export weakness and job losses persist
Caixin PMI data showed that Chinese economic growth gained
momentum in June, adding to further signs that the economy is
recovering from the impact of the coronavirus pandemic. Business
sentiment and order book growth also improved solidly. The survey
data also indicate how the recovery has been fuelled mainly by
domestic demand amid a weakened global trade environment. With
employment continuing to fall in June which, in turn, could
dampened local consumption, further recovery may be limited,
especially if external demand remains subdued.
Gradual recovery
The Caixin headline Composite PMI*for mainland
China, compiled by IHS Markit and covering manufacturing and
services, rose from 54.5 in May to 55.7 in June, indicating the
fastest improvement in business conditions since November 2010.
While encouraging, the latest reading, when put into perspective
by comparing with the record contraction suffered in February at
the peak impact of Chinese lockdown measures, indicates only a
partial recovery of lost output.
The ability of China's businesses to regain stronger growth was
in part constrained by a lack of demand in the export sector amid a
worldwide trade downturn. Total new orders rose at the fastest rate
since the start of 2011 in June, but export business continued to
fall.
In the absence of foreign demand, the easing of social
distancing restrictions provided the most significant boost to the
economy, benefitting domestic-facing sectors over export-oriented
sectors. Services business activity consequently rose sharply in
June, growing at a pace unsurpassed for just over a decade. In
contrast, manufacturing output growth lost some momentum.
Export weakness
Chinese factories remained more reliant on domestic demand than
foreign markets in June as the flow of global trade continued to
underperform. Total new orders (including both domestic and export
sales) for manufactured goods rose for the first time since
January, though the rise was only modest due to a further fall in
export orders.
In the service sector, overall sales growth accelerated to the
fastest for nearly a decade, supported by a renewed growth in
services exports. However, detailed data showed that the export
gain was driven primarily by financial and insurance services,
while foreign demand for both consumer and business services
continued to contract.
Job losses
The ongoing decline in overall employment raises a concern of
the sustainability of further recovery. Chinese firms continued to
reduce staff numbers during June, though not as severely as the
record pace seen in February. Job losses were reported across both
manufacturing and service sectors, with the sharpest job shedding
recorded in firms providing consumer services as well as producers
of textiles and chemical-related goods. Any further weakening of
the labour market could dampen consumption trends which, in turn,
will likely impede the recovery.
Outlook
Business sentiment about the year ahead rose further in June,
reaching the joint-highest for five years, as firms anticipate
further improvement in the COVID-19 situation. But the recovery
ahead is expected to be contingent on there being no serious second
wave of infections or further shocks, or escalation of global trade
weakness.
The increase in the level of backlogs of work in June was also
subdued, underscoring how demand needs to strengthen further in the
coming months to prevent the recovery from losing momentum.
*Data for Caixin China PMI surveys were collected 11-22 June
2020.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
